Trading the Trend - Finding Bowls

On the first trading day of 2009, 2 January, the FTSE 100 closed at 4,562. This was up 24.5% from the low of 3,665 two months earlier on 27 October 2008.

The 6 January saw the highest traded point that half 2009, with the FTSE 100 plumbing a fresh low of 3,463 on 9 March – a 24.1% slide. 

It then closed the year at 5,932 – surging 71.3%! That’s a lot of volatility for one year. 

Many tend to believe that markets trend in one direction consistently, either up or down. The reality is that the market is choppy, and many of the market’s best days and rallies come in bear markets. 

This could be the beginnings of the early bull stage, but that doesn’t mean we can’t see a 20% slide in equities. The vast majority stocks are flying at the moment, with all sorts of dogs being taken out for a walk. It is the type of market where you can pick a random stock and probably make money just by the virtue of being long, and whilst it is incredibly fun it does promulgate the idea that one is a good trader in a market and not a trader in a good market. 

It also breeds complacency, as both traders and investors become accustomed to a rising market, and begin to forget about risk management, stop control, and exit plans. 

The market isn’t as fun as when stocks were in freefall a few weeks ago, but for the active trader there are many opportunities to get involved in swing trades.

The cup and handle we have talked about in my recent articles continue to be my go-to pattern of choice. Lots of stocks are forming bowly bottoms, where we see the price begin to curve upwards. 

Senior plc 

Here’s one I bought a few days ago:

I don’t know what Senior does, but the company announced a “Financing Update” which spoke about covenant relaxations and the phrase “sufficient liquidity under existing committed facilities”. 

It provided certainty to the market, which has been a key driver of stock prices in recent months. After many equity placings, stocks rise. Once the issue of funding or potential dilution is removed, the stock is then free to rally without the shackles of fear.

On Thursday, the directors bought sizable amounts too, and so I think there is more to come from this stock. I’m looking to add to my position on a dip. For me, this is clearly a buy the dip market for now, and I’ll keep doing it until it stops working. Adding to winners and buying strength in a bullish market can deliver high R winners.

I’ve heard people say they haven’t seen anything like this since Dotcom, and Carnival (a stock that broke out of the level we looked at last week) was up 20% yesterday at one point. Many stocks surged on the US jobs report yesterday at 1:30 UK time – it may be worth watching out for this report in future. 

SIG plc

Another bowly stock is SIG plc, or LSE: SHI, that we looked at a few weeks ago. A journalist leaked that a placing was being done, claiming that it wasn’t inside information, but also claiming that his job was to get inside information. 

Whilst anyone not inside who then leaks inside information is not technically breaking the law, it undermines the whole point of a fair and well-regulated stock market. One only needs to look at Avacta this week, which fell from 200p with a placing conducted at 120p. Anyone piling in at 200p after a stratospheric 1,000% rise needs their head examining, but private investors should lose cash due to their own mistakes, and not because of market abuse. It’s a shame the FCA rarely do anything about such abuse, but that gripe is for another day. 

In any case, SHI shrugged off the placing rumours, and the placing was done at a relatively modest discount, considering the company raised £150 million. Since then, the stock has rallied, and broken out of the target level identified. It took a while, but the cup and handle played out.

Hunting plc

I’m also long Hunting plc as of yesterday morning. Sadly, the price has rose before I could get my full fill bidding, and I believe the next good entry where I will average up is on the break of 230p. A breach of this resistance may see the gap closed.

Looking at the chart, it’s been gently rising. If we look closer, there have been a few high-volume days which show buying appetite. 

This stock has been lagging the market, and I’ve put a stop under the recent lows. 

Bakkavor plc

Bakkavor is another one breaking out. This is a stock that supplies food to most supermarkets, and has taken out the 50 EMA. I use this as a trend indicator. It’s simple, but many stocks test this EMA as resistance and support. You don’t need twenty indicators to tell you what to do – moving averages can be powerful indicators when used correctly. 

Revolution Bars Group

I’ve also subscribed for the Revolution Bars Group placing, which Paul has done an excellent job of covering in today’s Small Cap Value Report. 

 In my view, the SCVR is invaluable as a trader – despite it being an investing column – because I find it useful to get trading ideas and thoughts from. Many of my trades are short term in nature, but quality companies that are identified in the report often have strong momentum and provide breakout opportunities, and so for me it’s always worth checking it on a regularly basis.

I’m happy to risk 50% on this, in the hope of making 100%+. Given the placing, and the cash burn of £0.4m per week, it’s not going to go bust overnight. It’s not going to bag overnight either – as it has in recent weeks, but trading is about weighing up what you have to risk in order to seek profits. By ensuring that you constantly take trades you feel are weighted in your favour, you give yourself the best chance for success. 

This weekend, I’ll be searching for stocks that are beginning to look like a bowl, writing down the potential breakout point, as well as looking for cup and handles. I’ll also be upping my stocks on all current holdings. If this is the beginning of the new bull market, then now is the time to do the work and find great longer-term trades.

You can download your free copy of Ten Habits of Highly Profitable Traders from Michael’s website at www.shiftingshares.com 

Twitter: @shiftingshares